Dec. 7 (Bloomberg) -- Treasuries increased for the first
time in three days on concern Europeans are struggling to
resolve sovereign-debt turmoil before this week’s summit in
Brussels and the European Central Bank’s meeting.

Yields on 10-year notes dropped the most in almost a month
as Standard & Poor’s warned the European Union that it may lose
its top credit rating and an official said Germany is rejecting
proposals to combine current and permanent euro-area rescue
funds, spurring demand for safety. The extra amount banks pay
over the U.S. government to borrow for three months increased to
the highest level in more than two years.

“In the face of the looming announcements from the ECB
tomorrow and the EU leaders on Friday, people don’t want to
stake out big risk positions,” Chris Ahrens, head interest-rate
strategist in Stamford, Connecticut, at UBS AG, one of the 21
primary dealers that trade with the Federal Reserve.
“Easing rates may alleviate near-term pressures, but it
doesn’t alter the longer-term structural issues.”

Yields on 10-year notes decreased seven basis points, or
0.07 percentage point, to 2.02 percent at 3:04 p.m. New York
time, according to Bloomberg Bond Trader prices. The 2 percent
securities maturing in November 2021 advanced 21/32, or $6.56
per $1,000 face amount, to 99 27/32. Yields earlier dropped
eight basis points, the most on an intraday basis since Nov. 9.

Germany’s Stance

“The U.S. as a safe harbor is benefiting from the flight
to quality, given the broader uncertainties coming out of
Europe,” said Ian Lyngen, a government bond strategist at CRT
Capital Group LLC in Stamford. “There are headlines suggesting
the situation in Europe will not be as simple a fix as the
market thought.”

Germany will oppose any attempt to change an agreed-upon
sequence in which the permanent European Stability Mechanism
will take over from the current rescue fund at an appointed
time, a German official told reporters in Berlin today on
condition of anonymity because the negotiations are private.

The rejection came amid divisions among the 27 European
Union member states on the latest bid to deliver the euro area
from its two-year-old crisis as the leaders head to a Dec. 8-9
summit in Brussels.

Rally in 2011

Treasuries have risen this year as Europe’s failure to deal
with its fiscal turmoil encouraged investors to take refuge.
U.S. debt securities have returned 8.7 percent this year, the
most since the 2008 financial crisis, according to a Bank of
America Merrill Lynch index.

“There’s a lot of uncertainty out there in the market,”
said Michael Cloherty, head of U.S. interest-rate strategy in
New York at RBC Capital Markets, in a radio interview today on
“Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
“Everyone’s waiting to see what type of news comes out on
Friday. It’s a possibility that we’re disappointed again.” The
Royal Bank of Canada unit is a primary dealer.

In a sign of reluctance to lend, the TED spread, or the
difference between the three-month U.S. bill rate and the London
interbank offered rate, or Libor, climbed to 54 basis points,
the highest level since June 2009. Three-month Libor increased
to 0.54 percent, while the rate on U.S. bills remained at zero.

ECB Outlook

The ECB may announce a range of measures tomorrow to
stimulate bank lending, said three euro-area officials who spoke
on condition of anonymity because the discussions are private.
Options include loosening collateral criteria so that
institutions have more access to cheap ECB cash and offering
them longer-term loans to ease the flow of credit, the officials
said. Two said a reduction in the 1.25 percent target lending
rate is likely.

“Some people are expecting a 25 basis point cut, and some
are expecting a 50 basis point cut,” said Jason Rogan, director
of U.S. government trading in New York at Guggenheim Partners
LLC, a brokerage for institutional investors. “If they announce
a 25 basis point cut, that may disappoint the market a little
bit.”

The Fed sold today $1.33 billion of Treasury Inflation
Protected Securities maturing from April 2012 to April 2014
under a program to replace $400 billion of short-term debt in
its portfolio with longer-term Treasuries to cap borrowing costs
and support the economy.

U.S. Offerings

The U.S. government may announce tomorrow that it will
offer $32 billion in three-year notes, $21 billion in 10-year
debt and $13 billion in 30-year bonds next week, the same as in
the previous auctions of similar securities in October, RBC
Capital Markets said in a research note to clients yesterday.
The government is also probably due to auction $12 billion of
five-year TIPS, according to RBC.

Bank of America Merrill Lynch’s MOVE index, which measure
price swings in Treasuries based on prices of over-the-counter
options maturing in two- to 30 years, dropped yesterday to 93
basis points, the lowest level since August, and just below the
2011 average of 94 basis points. The gauge reached a high of
117.8 basis points on Aug. 8, three days after S&P lowered the
U.S. credit rating to AA+.

About $182 billion of Treasuries changed hands yesterday
through ICAP Plc, the world’s largest interdealer broker. The
amount is below the average of $293 billion for 2011.